What is a backup contract?

Definition of Backup Contract

A backup contract is a legal document that is drawn up as a replacement for the main contract. The primary reason for the backup contract is to make sure there is a legal contract in place in case all conditions in the initial contract are not met.

A backup contract is a signed agreement that puts a secondary buyer next in line to purchase a property. While real estate purchase agreements do differ from province to province, these documents only become contracts when an offer is made and accepted by both the seller and buyer.

Why is this term important?

The backup contract will replace the first contract (in real estate, this contract is known as an agreement of purchase and sale) if the first fails. If the first is consummated the backup contract becomes void.

While real estate purchase agreements can differ from province to province, these documents become legal contracts once the seller and buyer agree to the terms. However, the time period where all terms of the contract are being met is known as a contingency phase—a period of time when many contracts are legitimately terminated by either the buyer or seller. At this point, the seller is now open to receive backup offers and contracts. These backup contracts sit in second place, waiting for the first contract to either conclude or break down.

There are different types of backup documents. A backup contract may only be entered if they initial offer stipulates that the seller is allowed to enter into negotiations with additional parties during the contingency period. This can occur if the initial offer has a very long closing period or the initial offer can only be finalized once the buyers are able to sell their current property.

A backup offer, on the other hand, is an offer made on a property before the initial offer is finalized. This offer is not legally binding and cannot be considered a legal deal. It's simply a way for an additional buyer to stake a claim in a property, should the initial contract fall through.

Examples of term

If a contract that was drawn up to complete the purchase of a property failed, because the buyer failed to fulfil his or her end of the agreement, the backup contract would kick in and take over and continue the sale under the terms outlined in the backup contract.